Depository System Introduction The securities transaction involves purchasing of securities till getting the certificates duly transferred

and endorsed in the name of buyer is quite complex and time consuming process which consists of variety of problems like: Bad deliveries due to signature differences Tearing and mutilation of certificates Fake certificates Mistakes in completion of transfer deeds Cost of transfer of stamp duty Postal delays and charges

A need was felt for script less depository system of security movements and it was enacted in the Depository Act, 1996 in India. A depository system just runs like a bank where all the physical securities are converted into electronic form and this created a one more option for investor on how to manage his/her/it securities. Here is an analogy between a bank and a depository. BANK Hold and safe keep funds in an account Transfer funds without handling the money on instruction of account holder The currency note number cease to have any importance Constituents of Depository System The Depository: A Depository is an organization which holds and transacts securities, of an investor, in the electric form. There are two organizations registered under SEBI namely National Securities Depositories Limited (NSDL formed in 1996 jointly promoted by IDBI, UTI and NSE) and Central Depositories Service (India) Limited (CSDL formed in 1998 and set up by BSE). The minimum net worth of a Depository as stipulated by SEBI is Rs. 100 Crore. The Depository Participants (DP): A depository does not directly interact with the investor so it appoints an agent to act as an interface. Public financial institutions, commercial banks, foreign banks in India, stock brokers, custodians etc registered by SEBI to act as DP. There are total of 711 DPs (266 with NSDL and 445 with CSDL) registered by SEBI. The Issuing Company: The companies which issue securities to the investors. The Investors: The holder of the securities. DEPOSITORY Holds and safe keep securities in an account Transfer securities without handling them on instruction of account holder ISIN number of a security cease to have any importance

Working and Operations of Depository System The company, whose securities to be transacted needs to be registered with depository. The investor has to open a Beneficial Owner (BO) Account with a DP of any depository through the account opening form along with securities papers, Photostats of Bank Account, POI (proof of identity),POA (proof of address), PAN card etc. The DP then verifies with the company or companies and the depository and then provides a unique number which is BO ID; this account contains equivalent number of shares in electronic form. BO account is now a necessity, since 99.9% transaction take place in electronic form. All the securities of the investor are converted into electronic form (Dematerialization), Thereafter the investor can enter transactions of sales and purchases of securities with any broker registered with Stock Exchange managed by a DP. However they can be reconverted into original form (Rematerialization). Investor can also freeze his account if he does not want to make any transaction (Pledge/Hypothecate). The transaction made, are updated within the company and BO account. An investor can have single or multiple accounts in one DP or can have accounts in two DPs. In the depository system investor name is entered as beneficial owner and depository name as registered owner, however only beneficial owner enjoys all the rights like voting and dividend.

Note: Investor has to pay charges towards Dematerialization and Rematerialization of charges, annual account maintenance charges and transaction fees (for selling). Also the bank account updated details are required for easy transfer for any corporate benefit or dividend or earnings so as to avoid any fraudulency. Benefits of a Depository System Safe and convenient way to hold securities as it eliminates risk of delays and bad deliveries. Reduction in paperwork and transaction cost. The problem of odd lot is eliminated as it does not have any concept of market lot. No stamp duty of shares transfer etc. Immediate transfer of ownership of securities.

Credit Ratings Agencies Introduction Credit Ratings is the process of assigning a symbol with specific reference to the instrument being rated, that act as an indicator of the current opinion on relative capability on the issuer to service its debt obligation in a timely fashion. This system was started in U.S.A in 1841 by Mercantile Credit Agency and become significant after the Great Depression. It entered India in 1987. The credit ratings are specific, relative and act as a guiding tool but are not a recommendation. They cover broad parameters quantitatively and qualitatively. Process and Factors of a Credit Rating The credit rating involves following steps: Contract between rater and client Sending expert team to clients place Data Collection Data Analysis Discussion Credit Report Preparation Submission to Grading Committee Grade communication to client They are used by client as a factor, benchmark or even as a information

The factors include Business factors (which considers nature of industry, market position, efficiency of operations, project risk, protective factors and quality of management etc.), Financial factors (which considers financing policy, flexibility of financial structure, past track record, quality of accounting policy, financial performance indicators like profitability, gearing, coverage ratios, liquidity and cash flow) and for financial markets Equity Grading factor is used. Domestic Credit Rating Agencies CRISIL: Credit Rating and Information Services of India Limited was established in 1987 and was jointly promoted by ICICI, nationalized and foreign banks and insurance companies. For the overseas market it has tie up with Standard & Poors. The services offered are Ratings services of long, medium and short term debt instruments, securitized assets and builders Information services of corporate research reports and CRISIL 500 index Infrastructure services and consultancy on assistance of specific sectors such as power, telecom and infrastructure financing

ICRA: Investment Information and Credit Rating Agency of India Limited was established in 1991 and jointly promoted by IFCI and 21 other shareholders comprising of nationalized and foreign banks and insurance companies. The services offered are Rating Services of debt instruments and credit assessment Advisory Services of strategic counseling, general assessment such as restructuring and services to specific sectors such as power, telecom and infrastructure financing Information Services of credit reports and equity (equity grading and assessment)

CARE: Credit Analysis and Research was established in 1992 and jointly promoted by IDBI, banks and insurance companies. The services offered are Rating Services of debt instruments and credit assessment Information Services of sector specific industry reports

Other agencies in India include Duff and Phelps Credit Rating India Limited (DCR India) and ONICRA Credit Rating Agency of India Limited. Benefits of Credit Rating Agencies Provides information, systematic risk evaluation in easy to understand method to the investor Provides a benchmark and wide investor base to the issuer Provides efficient and effective practicing and monitoring tool for intermediaries

Limitations of Credit Rating Agencies They are guidance and not a recommendation and does not take responsibilities of any risk They are based on assumptions Due to competition among agencies, a firm can switch for much favorable ratings

The following figure shows how ICRA is using alphanumeric symbols to indicate the debt instruments.